IRS Issues Revenue Procedure 2012-17

On Feb. 13, 2012, the Internal Revenue Service issued Revenue Procedure 2012-17, which in part provides that partnerships may furnish their partners with an electronic copy of their Schedule K-1 if the partner has affirmatively consented to receive the K-1 in electronic format, such as in pdf form in an e-mail.

The Revenue Procedure provides several examples of methods that firms can use to receive confirmation of a partner's consent. Among other things, firms must: 1) provide a disclosure statement, including instructions on how to access and print the statement; 2) define the scope and duration of the consent, and the partner must be informed that he/she can withdraw the consent in writing; 3) indicate whether a subsequent request by the partner for a paper copy of his/her K-1 will be deemed a withdrawal of consent; 4) describe the hardware and software that will be necessary to access, print and retain the K-1, when the K-1 will no longer be available on the website, and inform the recipient that the Schedule K-1 may be required to be printed and attached to a federal, state or local income tax return; 5) state the conditions under which the firm will no longer furnish a K-1 electronically (for example, the recipient partner's withdrawal from the partnership); 6) state that the recipient will receive a paper K-1 if consent is not obtained.

For more details, please see the Revenue Procedure, available at this link: www.irs.gov/pub/irs-drop/rp-12-17.pdf

The Revenue Procedure states that it is effective as of Feb. 13, 2012, and a failure to comply with the requirements may be deemed a failure to furnish the partner a K-1 as required under IRC ' 6031(b), with the possibility of penalties under IRC ' 6722. However, many law firms have reported that the timing of the issuance of this Revenue Procedure will make it very difficult to obtain consent before the 2011 K-1s are issued to their partners (the filing date for individual income tax returns is April 17, 2012, if no extension is requested). Many law firms have distributed by e-mail or other means a pdf copy of each partner's K-1 for several years now.

Law firms that intend to furnish their partners with an electronic copy of their Schedule K-1s will need to satisfy the many requirements set forth in Revenue Procedure 2012-17 in order to do so. Further, this will create an extra record-keeping obligation for firms, so if audited for compliance with this Revenue Procedure, firms must be able to prove that their notice and consent procedure included all the mandatory information. Further, a copy of each partner's consent to receive their K-1 in electronic form (or the partner's communication declining and choosing a paper copy, instead), should also be retained.

Stanley Kolodziejczak, a member of this newsletter's Board of Editors, is co-chair of the Law Firm Services group of PricewaterhouseCoopers LLP and has more than 25 years of business, tax and accounting experience. His current experience is working with law firms that are facing the challenges of growth in a changing global market. He can be reached at 646-471-3160 and [email protected]. Nancy Regan is a director in the Law Firm Services group with more than 15 years of experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].

On Feb. 13, 2012, the Internal Revenue Service issued Revenue Procedure 2012-17, which in part provides that partnerships may furnish their partners with an electronic copy of their Schedule K-1 if the partner has affirmatively consented to receive the K-1 in electronic format, such as in pdf form in an e-mail.

The Revenue Procedure provides several examples of methods that firms can use to receive confirmation of a partner's consent. Among other things, firms must: 1) provide a disclosure statement, including instructions on how to access and print the statement; 2) define the scope and duration of the consent, and the partner must be informed that he/she can withdraw the consent in writing; 3) indicate whether a subsequent request by the partner for a paper copy of his/her K-1 will be deemed a withdrawal of consent; 4) describe the hardware and software that will be necessary to access, print and retain the K-1, when the K-1 will no longer be available on the website, and inform the recipient that the Schedule K-1 may be required to be printed and attached to a federal, state or local income tax return; 5) state the conditions under which the firm will no longer furnish a K-1 electronically (for example, the recipient partner's withdrawal from the partnership); 6) state that the recipient will receive a paper K-1 if consent is not obtained.

For more details, please see the Revenue Procedure, available at this link: www.irs.gov/pub/irs-drop/rp-12-17.pdf

The Revenue Procedure states that it is effective as of Feb. 13, 2012, and a failure to comply with the requirements may be deemed a failure to furnish the partner a K-1 as required under IRC ' 6031(b), with the possibility of penalties under IRC ' 6722. However, many law firms have reported that the timing of the issuance of this Revenue Procedure will make it very difficult to obtain consent before the 2011 K-1s are issued to their partners (the filing date for individual income tax returns is April 17, 2012, if no extension is requested). Many law firms have distributed by e-mail or other means a pdf copy of each partner's K-1 for several years now.

Law firms that intend to furnish their partners with an electronic copy of their Schedule K-1s will need to satisfy the many requirements set forth in Revenue Procedure 2012-17 in order to do so. Further, this will create an extra record-keeping obligation for firms, so if audited for compliance with this Revenue Procedure, firms must be able to prove that their notice and consent procedure included all the mandatory information. Further, a copy of each partner's consent to receive their K-1 in electronic form (or the partner's communication declining and choosing a paper copy, instead), should also be retained.

Stanley Kolodziejczak, a member of this newsletter's Board of Editors, is co-chair of the Law Firm Services group of PricewaterhouseCoopers LLP and has more than 25 years of business, tax and accounting experience. His current experience is working with law firms that are facing the challenges of growth in a changing global market. He can be reached at 646-471-3160 and [email protected]. Nancy Regan is a director in the Law Firm Services group with more than 15 years of experience as an attorney in and around global law firms. She can be reached at 646-471-6104 and at [email protected].